Freeport-McMoRan, Inc. (NYSE:FCX) BofA Securities Global Metals, Mining & Steel Conference Call May 16, 2023 3:30 AM ET

Company Participants

Richard Adkerson - Chairman and Chief Executive Officer

Conference Call Participants

Lawson Winder - Bank of America Securities

Lawson Winder

Good morning, and hello, everybody, again. Thank you. For those of us who are just joining now, I will again welcome you to our 40th Annual Bank of America Global Metals, Mining and Steel Conference. And I'm Lawson Winder, North American Senior Metals and Mining Analyst. And it is my distinct pleasure to have with me today from Freeport-McMoRan, Chair and Chief Executive Officer, Richard Adkerson. Now having been part of Freeport, Richard, for -- since 1989, you're synonymous with the company and also synonymous with copper. And, Richard, welcome to the 2023 edition of our conference.

Richard Adkerson

Thank you very much. Actually, I did a lot of work for Freeport before I joined so many years ago. It's great to be back here at this conference. Lot of memories, a lot of good times. And we really appreciate Bank of America Merrill Lynch for sponsoring. Thank you.

Lawson Winder

Well, Richard, to be honest with you, it wouldn't be the same without you. You've been to almost every edition of this conference since it started. Thank you.

Richard Adkerson

Yes. I'm older than dirt.

Question-and-Answer Session

Q - Lawson Winder

Where I wanted to start, Richard, was with the copper price, to get your view on the copper market. So a lot of investors are concerned with a new wave of supply coming just at the same time as the global economy seems to be maybe slowing somewhat. How do you view these sort of factors in the copper market? And do you think there's a risk of a downturn in the copper price in the next 12 months?

Richard Adkerson

If price is too low, let's start with that. Mike did a great job talking about a company as complex as BHP. Freeport is so simple. I mean, we have had now a 20-year focus on the strategy we have now of being committed to copper. We've built a company around it, got a great set of assets.

And all these years in the natural resources business, my earlier years were in the oil and gas business, has taught me to prepare for the long run and position your company to live through uncertainties in the short run. You all know more about what to expect in the near-term economy from all the complications we have, inflation and China and situation in Europe, central bank policies and all of that. So that creates a lot of uncertainty near term.

At Freeport, we prepare ourselves to deal with it by having a strong balance sheet, which we didn't always have but we do now. And that's a great thing for a high operating leverage company like ours to have a strong balance sheet to deal with whatever you have to deal with. And then we've had experience.

Our team has been together for a very long period of time, very focused on the assets that we now manage, and we have experience in adjusting, flexing those assets to deal with things. So people get frustrated with me sometimes because they say, you've been in this thing so long. Sure you know what's going to happen next year. And I really don't let myself think about that.

But I am increasingly confident about this being the right business for Freeport to be in, the copper business. And that was developed years ago, and now it's kind of consistent with what other companies in the industry are saying. There are new projects coming on. In fact, this year was supposed to be a year of major surpluses.

You go back a couple of years ago and people were predicting major surpluses this year. And they're not occurring. There's new production coming on. After that new production comes on, the pipeline is pretty bare, though. It's really bare. And this is an industry that you can't turn a spigot on and get new production quickly. We have very substantial reserves and resources and we know how long it would take us to get them engineered, permitted, structured to go forward.

So we continue to believe that the market is going to be challenged to meet the growing demands for copper. Everywhere you go, people are now talking about artificial intelligence and electrification. Last year, or before last, we were all talking about climate change investments. However you look at the world today, it's becoming more electric. Two-thirds of copper or more goes into electricity.

And so that demand is growing. And I'm still a believer in long-term structural growth from improving economies in the global world. I mean, there's going to be ups and downs with that. So I'm really confident about our strategy and confident about the way we're running it, and I've never felt better about Freeport's business.

Lawson Winder

That's fantastic. So I also wanted to ask about M&A. It's been a recurring theme the last little while, but also at this conference. And I wanted to ask, has Freeport been active in evaluating M&A opportunities? And then do you look at M&A outside of copper? And so I'm thinking of like molybdenum or gold like assets where you have really strong businesses today or do you look at any other decarbonization related metals? And then if I might also ask a follow-up, perhaps prematurely, but I'd also like you to address the question, is Freeport an M&A target?

Richard Adkerson

So I've been saying for a number of years now that M&A was coming to our industry. We've got companies that are -- have really strong financial resources. They have copper as a priority and have had copper as a priority for years. And it's striking, the lack of growth in copper that these well-financed technically strong companies have been able to achieve over 20 years. And so that's, I think, inevitably going to lead to M&A activity.

You also look over your shoulder and you look at the industry's history with M&A and it's not very pretty, including in our company, which 10 years ago made a bad decision to invest in the oil and gas business. But almost every company has made bad M&A deals. That's made management reluctant, boards reluctant to do things. So that's a barrier. And the copper business, I don't know if you follow us closely, I became Chairman two years ago, added six new directors, including four CEOs or retired CEOs. Two of them came from the oil and gas business. And we've been talking about how copper is different.

You can build up an oil and gas business by starting small and getting bigger. You don't see that happening in the copper business. We have a saying at Freeport, big mines get bigger and small mines get smaller. And the companies that own the best mines today don't want to give them up. So it's not an asset traded industry of significance to the global and to the total industry picture if there's something that happens.

So we at Freeport don't have growth through M&A as part of our strategy. We are focused on our internal development of our resources and our reserves through brownfield expansions. And that's what the focus of our business is on. Where M&A might happen and, yes, we know everything. Your bankers and other bankers line up our doors. We know that's the way bankers work. So we're aware of everything that goes on in the industry and follow it closely.

Our successful game-changing creation of modern Freeport transaction in 2007, Phelps Dodge, was not a strategic plan to do that. It was an opportunity that arose. And I think the best deals are deals when you have an opportunity that comes together and you take advantage of it. Too often, when management teams or boards to say, strategically, we want to do this or that, those deals are forced and often don't turn out well. So we're not counting on it.

New deals have to compete with our own resource development opportunities where we capture all the value for that. We don't get much value at all in our shares today from our undeveloped reserves and resources. And at today's stock price level, we believe that Freeport stock is a good investment. So even though if we have a financial policy that includes dividends and share buybacks and depending on cash flow it would be hard for us for acquisition opportunity to compete for us in terms of investing in our own shares. So it's unlikely, but if the right opportunity came, we're prepared to talk about it.

Not interested in gold. I mean, Grasberg is the largest single gold mine in the world. That's a whole different industry. The reinvestment risk, the nature of the assets and so forth is just not something we see as a fit. The one point, we were a company that was two-thirds copper and one-third gold, and it was tough to sell to investors because of the different objectives in gold and copper investors.

But the gold industry is its own world and not our world. Molybdenum, we're the world's largest producer. It's a specialty metal and we're fine with where we are today. And we'll make money out of it and continue just to manage that. But copper is our focus and that's what Freeport is all about.

Lawson Winder

Yes, that's very clear. You touched on the outlook for Freeport and, going forward, the assets that you have in your portfolio. So maybe if you could just speak to some of the goals that Freeport has for the next five, 10 years and where you see the company heading.

Richard Adkerson

Well, the backbone of Freeport's execution, and we've shown we can do that. We looked at the risk, I mean, and all our shareholders and people who follow the industry looked at the risk we had of converting the Grasberg mine from this enormous open pit operation to the world's largest underground mine.

And it was a 20-plus year challenge. We've met the challenge. And today you look at our numbers, I mean, it's the second largest copper mine in the world. And our net cash costs were negative in the first quarter and projected to be negative for the year. I think we said negative $0.15 a pound. Think about having the second largest copper mine in the world with a negative cash cost. It's a great asset to build the company around.

Execution in the Americas is a different deal. Lower grade mines, challenges like we faced in the first quarter in Peru and in the US with weather events and labor challenges, and so it's -- the execution there is really important to continue to be profitable with low-cost, low-grade mines.

We're really excited about this opportunity that leaching is providing Freeport. Morenci, largest mine in North America, is the world's largest leaching operation. Freeport's legacy has been the development of oxide leaching over the years. We have these enormous active leach stacks, and beyond that, historical inactive lead stacks have a lot of copper in it. And our team is just tremendously excited about that.

We've got a near-term target of, we talk about pounds, but it's 200 million pounds. We've got a medium-term target to raise that to 800 million pounds. That's 800 million pounds of copper. You look at what the industry is investing in new mines today. And that's one thing that gives you pause. You look at how budgets are overrun, what the cost of acquisitions are. And here we have this sitting right there with virtually no capital to invest in, no permitting because the stacks are permitted, no carbon emissions and recovering that much copper. I mean, that's really meaningful. And then beyond that, we've got these historical stacks. We're looking at competing with copper concentrating and resource development.

Our internal team is very excited about it. We're looking at a number of different technologies for additives, which I think a lot of investors are overfocusing on. But it's more of the physical aspects of it. We're using heat in a way to free up more copper. And what we're really doing that's exciting is using technology to measure what's going on in these huge leach stacks.

They have different minerology within the same stack, so different additives, different approaches might work. And our team is really excited. Historically, you have a big stack, you'd sprinkle acid and water on it and whatever came out, came out. Now we're putting ways, probes in to measure what's going on inside the stacks and adjusting operations and getting more out of it. As I said, low capital and a good bit of copper.

Lawson Winder

I'm glad you touched on that. Last year in Miami, Kathleen was with us. And she talked about the 200 million pounds. You're now talking about 800 million of potential production from leaching. How big can that get? What's the ultimate tank house capacity that Freeport has?

Richard Adkerson

Well, tank house capacity is not a problem. I think we got a huge amount of excess capacity now and tank houses aren't very expensive to build, right? They're not like building a concentrator. So that's not going to be the constraint. It's emerging technology. It takes time to see what works and what doesn't work. We got science just working in our laboratories going through that now. We've got joint venture relationships with other companies to work together on it.

And so it's, and if you follow us, we've got -- at Freeport we got a real strong sense of being conservative in our financial reporting and our outlook. So we're -- we don't -- we want to underpromise, overdeliver. But this is something that -- we just had our Board out to Morenci and I was so gratified to see our technical guys being so excited about it.

As I said, these leach stacks are enormous and there's a lot of copper in it, we think almost 20 billion pounds in the active leach stacks we have at Morenci right now. And how much of that we can get is to be determined. I mean, that's what these studies, technology and experience is going to show us.

Lawson Winder

Really exciting stuff.

Richard Adkerson

And then beyond that, we've got some brownfield development projects that are in the works that are going to take time, like everybody's do. The project in Chile that we have in partnership with CODELCO is -- we started -- we've been doing work on it for some time. But we're waiting to see what unfolds in Chile, the political process, to determine how aggressive do we pursue that. We've got a straightforward project at our Bagdad mine in Northwest Arizona, where we build a new concentrator and add significant production.

And we got, the one thing I'd like for you all to take away from here because, at one point, the copper business in the US was considered to be dead. It's a great place to operate now. It is a great place. You don't have the Grasberg-type grades to deal with. But we own all of our land in the US, virtually all of it in fee.

We don't have any royalties, no royalties. The current US tax law is, incremental tax, federal tax rate is like 12%. That law may change, but that's what it is today. The only blessing we got out of our oil and gas venture was a big tax loss carryforward. And so you look at that, and then we have community support, we worked hard to gain the support of Freeport of local community, state governments, regulatory agencies, Native American groups.

And so permitting takes time. That's what we're working with the US government to try to expedite, not arguing to change permitting standards so much but to expedite the process so that you can move quicker. But it's a great place to operate. It's going to be a huge part of the future of Freeport to see how that's developed.

And with what, I can't envision a scenario other than a world war, some huge global economic catastrophe where we don't have a higher copper price in the future. And to have these low-grade mines, the leverage to copper price is enormous. You get higher copper prices as you manage the cost, you make a lot of money. So that's a big part of our future.

Lawson Winder

That's music to everybody's ears. I wanted to pivot to Grasberg and just ask because there's been a lot of noise around that asset the last little while. So I mean to kind of --

Richard Adkerson

Well, I guess, 30 -- we've been there 55 years, and I've been going there over 30 years. So yes, a lot less noise than historically has been because of the success we've had, not only with developing the underground mine -- and we had this -- I mean, this is a tough, tough business. And Grasberg is a tough place to operate. It's high altitude. The original mine was at 3,500 meters.

The road leading up to Grasberg, it is the wettest spot on earth, according to the United Nations. It rains 200 to 400 inches a year there. It's been doing that all the time we've been there. So it's not new. But we had a major water event at our mill site. Our systems protected the mill. The mill wasn't damaged, but we had to clean up in the first quarter and so it affected our production volumes. Team came back strongly in March, and boy, they're just doing great right now.

So operationally, it's great. We got a great workforce. We don't have the challenge we used to have. And the relationship now with the government of Indonesia, that -- this is what's so gratifying with me. It's -- talk to every company here, and they'll -- everybody will talk about how tough it is to deal with resources over the long term in emerging nations. I mean, everywhere you have to deal with that.

And it was a challenge at Grasberg, but we reached a deal in 2018 where the government was able to increase its equity ownership interest in our Indonesian affiliate, PT Freeport Indonesia, by principally by acquiring Rio Tinto's joint venture interest. We agreed to build a smelter after years of arguing not to, and now it's a huge construction site. We're over 60% complete. It will be the world's largest single line smelter, very modern, efficient facility.

And in return, we secured the rights of FCX to operate the business, which we considered important. We've got stability in taxes and royalties going forward. And it's been a huge success for the government. They made a lot of money. You just look at what's going on since the end of 2018 and the expanding production, strong prices and so forth. Now we're talking about extending the right to operate beyond 2041.

I keep saying it's a long-term business. That will be a huge positive for all parties. It makes no sense and the President of Indonesia visited our site in late August, early January, and just he learned so much and recognizes that it makes no interest for any party to not manage this asset as a long-term development. This is not a coal mine. You can't stop mining, somebody come in and pick it up and start it up. This is a block cave operation.

We don't -- we really haven't identified the resource beyond 2041. In developing the mine plan to 2041, we've identified resources that will extend further. But we've had that 2041 date all along, it was in our 1991 contract. So we haven't done, one of the things Freeport made so much value out of after it acquired Phelps Dodge was to do extensive delineation drilling.

And that's where these resources we're talking about now came from. We haven't done that at Grasberg. And during all my years there, the asset just keeps getting bigger and bigger. And so now if we have the rights to operate beyond 2041, we will -- we already started actually, doing -- drilling to understand what the resource is. And one thing that's happened over the years is it just keeps getting bigger and bigger.

Now you say, what's the PV of that? But PV and mining industry is -- a long-life asset that gives you a base of assurance for long-life profitable operations is a real key to building the rest of your business. If you have that in place then you can be more aggressive in developing other opportunities.

And with that and I'm -- we still have some work to do and always it's complicated to deal with regulations and laws and other issues, so it's not done yet. But I have confidence it will be done. And when it happens, it will be an extraordinary incremental value for Freeport in the long run and make the rest of our business more valuable. Second largest copper mine in the world, minus $0.15 pounds to produce it.

Lawson Winder

It's remarkable. I wanted to see if the audience had any questions. And maybe just put up your hand if you do, and we will find a mic for you. In the meantime, Richard, can you just address one more thing on Grasberg? And that is, what is it that we're seeing in the news about this 10% interest that the government wants out of Grasberg?

Richard Adkerson

Well, we have no rights beyond 2041. I mean, right now, that's it. And so for us to get a deal that makes sense for the government, there has to be a give and take, just like we did in 2018. And they've asked for an additional incremental interest. We're prepared to do that. That would be post-2041. It's not now. And that would be part of the cost of us getting those rights to go forward. And we would work on a cost reimbursement situation so that it's a fair deal for our shareholders.

This is not like leading up to 2018 when we had to get it solved. I mean, this is a deal we'll do if it creates value for Freeport's shareholders. And this deal, the government will do if it creates value for the government. So we have to work with them together. And the relationships are so much better than they've ever been.

So the conversations have been very positive and the atmosphere is very positive and we're going to work to keep it that way. And Joko Widodo has done a great job, I believe, in my opinion, in leading that country through difficult times. And he fully appreciates, understands what's happened there.

He was taken back by the fact that 98% of our workers are Indonesian out of a workforce of 25,000, 30,000 people. 40% of our workers are Papuan. Indonesians are in senior management position now. And the partnership, from us having an Indonesian operation and bringing to the table from FCX's standpoint, a leading global copper company from a technology standpoint is really what's making this work in the way that it's working.

But we give attention to the local workers, we give attention to local communities, to the government. And we can't succeed unless they succeed, and that was a lesson that I've learned over the last 30 years.

Lawson Winder

Well, it seems like it's been very successful. I apologize, everybody, but we are out of time. And I'm sorry, Richard, we are out of time. We have to leave it there. But please, everybody, join me in thanking Richard for being here.

Richard Adkerson

Thank you all.